True or False: Late payment charges are considered a finance charge.

The correct answer is that late payment charges are not considered a finance charge under the Truth in Lending Act. A finance charge encompasses the cost of credit, including interest and other fees charged for the extension of credit, but it specifically excludes certain charges, such as late payment fees.

Late payment charges are additional fees applied when a borrower fails to make a timely payment on their obligation. Since these fees are not part of the cost of obtaining the loan or credit but rather a penalty for non-compliance with the payment schedule, they do not fall under the definition of finance charges as outlined in Regulation Z.

This distinction is important for lenders and consumers alike, as it affects the overall cost disclosed in loan agreements and the calculation of the annual percentage rate (APR). Understanding what constitutes a finance charge helps consumers better assess the true cost of financing and make informed borrowing decisions.